Sears Holdings: More Value Unlocking Transactions

Though Sears Holdings (NASDAQ: SHLD  ) soared nearly 12% during the trading session last Tuesday on news of further transformational transactions to unlock value, investors shouldn't be surprised by the announcement. Sears is one of the largest retailers in the U.S., but most investors don't realize the numerous business units that are hidden under the surface. The media has mostly spun the plans for Lands End and Sears Auto Centers, or SAC, as "liquidation moves", but investors should note the proposals don't involve raising cash from these units.

The company again detailed weak retail operations that include more comparable sales declines at the primary Sears and Kmart stores. Those details further highlight the problems with the vast assets hidden behind the primary stores. In general, the numbers provide nothing useful regarding the growth and prospects of the smaller business units that offer the biggest potential and value.

Transaction details
Rightfully so, the primary focus will be on the previously mentioned Lands End and SAC transactions. On top of those, the Sears Canada subsidiary plans to sell five store leases to Cadillac Fairview for $400 million, or an average of $80 million per lease. The properties include such prime locations as the Toronto flagship store at the Eaton Square mall. Investors should note that these locations are leases obtained at significant discounts to market rates for extended periods. The company is obtaining $400 million for stores it doesn't even own.

Interestingly, the market value of the 51% ownership position is currently valued at around $700 million. Apparently, these five leases alone were equal to nearly 30% of the total value of Sears Canada.

CEO Eddie Lampert made clear again that updating stores wasn't a solution to the problem with a hint toward the liquidity issues that surfaced at J.C. Penny (NYSE: JCP  ) following its massive redevelopment plan that failed. In some cases, the stores and especially the ones under lease are more valuable in the hands of other retailers instead of operating as a Sears. In those cases, Sears is better off grabbing $80 million per store, instead of spending millions upgrading each store similar to what J.C. Penny undertook. J.C. Penny recently had to raise $800 million by selling 84 million shares at a reduced price below $10. The stock has now collapsed below $8.

Better management focus
The Lands End and SAC units are under consideration for being separated in order to allow better management focus at those businesses. Being stuck within a major conglomerate typically holds back a brand from developing. Sears expects to structure the Lands End transaction such that existing shareholders would benefit from future growth of the stand alone entity. The suggestion is that shares might be spun off to shareholders similar to previous deals.

Interestingly, the managing director of Imperial Capital LLC suggested a valuation of as much as $1.7 billion to Bloomberg for Lands End. Recently Rue21 was taken private for 10.9 times EBITDA. Baker Street provided a mid-point valuation of around $1.4 billion for the division.

For SAC, Sears only mentioned the intention to seek strategic alternatives for the auto repair specialist. The subsidiary has a national footprint of 850 retail locations typically sitting on out-parcel lots of Sears locations making one wonder if Sears won't attempt some type of REIT transaction with a spun off entity. From, the Seritage website, the market already knows that Sears is pursuing redevelopment plans that include turning the auto centers into prime real estate at some of the top US malls.

The auto center has little in the way of comparable stocks, but Monro Muffler Brake Inc.  (NASDAQ: MNRO  ) does provide an interesting comparison. That company is currently valued at $1.5 billion with revenue growing double digits at around $200 million a quarter. Monro Muffler operates a similar 940 stores to SAC and sits near multi-year highs. The probability and valuation of Monro suggests now might be an opportune time to separate auto centers. The lack of national brands for auto repairs and the huge success of auto parts stocks suggest the potential to unlock a national brand. Worth noting was the recently reported 6% decline for tire related revenue backing up the move to position SAC away from that service offering.

Bottom line
At this point, the details are too sparse to speculate much on the valuation creation, but the encouraging part is the movement by management to unlock value of hidden assets. The devastating results at J.C. Penny provide some vindication to Sears' management that remodeling stores wouldn't have provided a better solution for declining sales. In addition, Sears appears to be monetizing the auto center assets right as a competitor such as Monro Muffler sits at multi-year highs.

Considering the vast retail operations, real estate ownership, and valuable brands, the ability to monetize a few minor assets for possibly more than $2.5 billion should add value to a company only valued at $6.3 billion presently, making it worthy of a closer look by Foolish investors. As always invests should do their own work 

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  • Report this Comment On November 04, 2013, at 8:14 PM, jasonrothman1 wrote:

    I've had a few conversations with employees at some stores It's not necessarily that Lampert hasn't invested in the stores that is the problem, although there is some indication that there is some truth to it, but that the "morale" of the employees have declined due to a massive "firing" of most of the full-time employees in February of 2012, no raises for most of them for nearly six years, no company match in their 401k's, and more recently, a nearly 50% reduction in company contribution to their health care plans. Many of them ask "how do you expect us to be happy and helpful if corporate doesn't make us feel wanted or appreciated?" I've worked many jobs and know all too well that a motivated salesclerk, motivates sales.

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